Financial Analysis British Petroleum (Bp) Till 2006
Essay Preview: Financial Analysis British Petroleum (Bp) Till 2006
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Financial Statement Analysis:
A companys financial statements and ratios are good indicators of its performance over the years. This report specifically compares the ratios for 2004 and 2005, with some additional insight into 2003, 2002, and 2001.
The current ratio has increased by 0.0534 from 0.9900 to 1.434. As the current ratio is a measure of liquidity and ability to meet short-term debt requirements, BP was more able to meet their short term debt obligations in 2005 than 2004. From 2001 to 2003 the current ratios were 1.0767, 0.9733, and 0.9600 respectively. In 2001, 2002, and 2004, BPs current liabilities were greater than current assets, indicating that BP may have faced some difficulty in meeting short-term debt obligations during these years. In 2003 and 2005 the current ratios were greater than 1, representing that BPs current assets were greater then its current liabilities for the year. BPs current ratios are less than the industry average, which simply means that there are other companies that are more successful at meeting short term debt obligations than BP for the industry. The industry median for the current ratio is 1.26.
The quick ratio has increased by 0.0246 from 0.7467 to 0.7713. Quick ratios are a measure of the financial strength or weakness of a company and gives insight into how liquid a company is. BP had a higher quick ratio in 2005 than 2004 which translates into being more able to pay liabilities in 2005. The quick ratio was even higher in 2003 at 0.8471; demonstrating that BP was more liquid in 2003. The ratios were lower in 2001 and 2002 indicating a lower ability to liquidate. The quick ratio for BP was lower than the industry average. This shows that BPs competitors are more liquid then BP is.
BPs inventory turnover ratio has decreased in 2005 from 18.1589 in 2004 to 12.5293 (approximately 31 %). The inventory turnover indicates how much of the inventory is left over in a year and how long it would take to sell excess inventory. This ratio can be a measure of efficiency; a lower ratio indicates that BP is better able to meet the needs of its customers without wasting funds by holding excess supply. On the other hand, a higher ratio could indicate strength in the sales of the firm or ineffective buying. In BPs case, the prior is more likely because the of the firms position as one of the top performers in its industry. In previous years, BPs inventory turnover ratio has been even higher than it is now at levels such as 22.9838, 17.6983, and 20.0199 from 2001 to 2003. The average of 20.234 indicates that BP had a better position in previous years than in more recent years. The industry median for this ratio is 16.2, meaning higher levels of excess inventory and lower sales for BPs competitors.
The days sales outstanding (DSO) has increased by 1.3389 from 59.7913 in 2004 to 61.1302 in 2005. DSO is the average number of days that a company takes to turn a sale into revenue. The higher a DSO ratio, the longer it takes for the company to collect money on sales. Therefore, an increase in DSO is not a positive change for any company. In turn, the increase from 2004 to 2005 indicates a weakening of BPs position. BPs DSO was higher in 2002 (63.9002) and 2003 (67.1514), and the decrease from those levels is a positive reflection on BP status.
The fixed asset turnover (FAT) for BP decreased by 0.0902 from a level of 2.9464 in 2004, to 2.8562. FAT shows how well your company uses its fixed assets to generate sales revenue. Fixed assets include furniture, equipment, buildings, copyrights, licenses, patents, and basically anything that cannot be resold. Fixed assets also depreciate over time. A higher FAT ratio is better so a decrease in the FAT ratio of BP is not a positive change. If plotted on chart, you would be able to see the general trend in the FAT for the company is in a positive direction over the past 5 years, this; trend reflects positive changes.
The total asset turnover (TAT) for BP has decreased in 2005 by 0.2670, from a level of 1.4395 in 2004. TAT measures how well the assets can generate revenue. A decrease in TAT is a negative sign as it means that assets are turning over into revenues at a slower rate. The industry average for TAT is considerably higher than that of BP, 1.7. This shows that the industry is doing a better job than BP of turning assets into revenue.
BP”s debt ratio in 2005 decreased by 0.0196, from 0.6129 in 2004. The debt ratio indicates how reliant the company is on debt financing of assets. A decrease in debt ratio is good because it shows that the company is becoming less reliant on debt as a source of asset financing. The general trend has been up for BPs debt ratio, showing an increase reliance on debt to finance activities. This can be good for stockholders because it gives them more leverage by magnifying expected earnings. Also, debt for a company is not always negative, if it is being used to further develop the companies profitability prospects, it can be positive.
The times interest earned (TIE) ratio has increased by 18.4476 for BP. TIE shows how much of a companys earnings are available to make interest payments. A high TIE ratio shows that the company can afford to make interest payments at the going interest rate. A low TIE ratio shows that the company will not react well to increasing interest rates. Over the past 3 years, the TIE ratio has increased from 22.3866 in 2003, to 38.7617 in 2004, and finally to 57.2093 in 2005. The industry average for TIE ratios is 30.23 in 2005. Indicating that BP is better off then most of its competitors in the event that operating income declines.
The basic earning power for the company has increased by 0.0230 in 2005 from 0.1257 in 2004. BEP is used to measure how effective the operations of a company are in terms of asset profitability and management. An increase in BEP is a positive change. This positive change is also reflected from 2003 to 2004 with a change of 0.0207, up from 0.1050.
BPs Return on Assets (ROA) went up to 6.82% from 3.82%. The increase while it appears minimal is an increase of 78.53%. ROA measures the profitability of a company based on assets. An increase in ROA is positive because it means that the company is generating more profits. BPs ROA is significantly lower than the industry average which shows that the there are other companies within the industry that are more profitable. The past ROAs for BP have also been significantly low.
The Return on Equity (ROE) has increased by 2.6% in 2005 from 2004. ROE measures how much profit a company generates based on investments from stockholders. An increase in ROE is a good sign and is what shareholders typically look for. In 2005 BPs